Should investors buy Lupin @ Rs 1,140?

Should investors buy Lupin @ Rs 1,140?

Lupin Ltd 2017 financial results

Lupin came out with its results day before yesterday. The stock price fell down by 7% on its Q4 figures and investors were dumping them out of their portfolios. Pharmaceutical sector similar to IT sector of India is today finding hard to grow their revenues and hold their margins.

What do we think about Lupin?

Q4 – 2017 results

Businesses are not static in nature. They keep changing. The rules change, law changes and also the margins and profits. Lupin generates US$2.7 billion from its business operations. Let us look at how its 4th quarter numbers look.

Lupin Ltd

Q4 – 2017

Q3 – 2017

Q4 – 2016

% Change Q4 Vs Q3

% change Q4 Vs Q4

Revenues

Rs 4,298.64

Rs 4,586.45

Rs 4,232.31

-6.28%

1.57%

EBT

Rs 518.67

Rs 1,042.57

Rs 1,169.89

-50.25%

-55.67%

Net Profits

Rs 380.21

Rs 633.11

Rs 747.88

-39.95%

-49.16%

The results look very ugly for the fourth quarter and we can now understand why Mr. Rakesh Jhunjunwalla was upset on the management. We found out about it from the Moneycontrol website.

The management phone interview with CNBC TV18 channel points towards the structural changes taking place within the pharmaceutical sector and stiff competition to it’s one of the star product ‘Glumetza’ is facing.

Investing looking through the rear view mirror is risky. Expecting them to repeat the same performance is the wrong expectation from a fast paced and always changing industry. As per the vice chairman Mr Kamal Sharma the 2018 results will be a bit in pressure but they do expect to breakthrough from this situation by investing and manufacturing specialty products in the years ahead. To buy this story you will have to do a bit of reading on what he is talking about and build your own investment conviction with this brand.

Cashflow

Let us look at how good they managed and allocated shareholders cash looking at their balance sheet.

Lupin Ltd

2017

2016

difference

Cash

Rs 681.83

Rs 792.66

-110.83

(LESS) Short Term Borrowings

Rs 2,304.33

Rs 1,745.41

-558.92

(LESS) Long Term Borrowings

Rs 5,647.78

Rs 5,373.90

-273.88

(LESS) Fresh Equity injected

Rs 13,532.09

Rs 11,195.45

-2,336.64

(ADD) Dividends paid

Rs 338.70

–

+ 338.7

Cash Profits

-2,941.57

So Lupin Ltd bank balance has fallen down by Rs 111 crore compare to 2016 financial year. The short term and long term borrowings have also shot up by Rs 559 & Rs 274 crore. They reinvested Rs 2,336.64 shareholders profits back into the business and they paid Rs 339 crore in dividends. End of the day they spent Rs 2,942 crore of cash from their business.

So where did they spent that money on?

They bought new property and plant worth Rs 1,300 crore, the inventories have jumped up by approximately Rs 300 crore, they also invested Rs 2,100 crore which reflects in their current investments and I will have to wait and see all the details about it in the Annual report. Almost Rs 3,500 crore was invested and we should see some kind of earnings to be generated from those investments in the coming years.

Lupin stock price is still trading within its 2018 valuations band. However, the lower band of valuations are still hanging around Rs 750. So it is definitely expensive to buy 100% of your stock allocation. Our allocation meter suggest not to buy more than 31% at today’s price.

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2 Comments

Sir mr.aziz.thanks for your analysis on lupin ltd.results.i came to know about your valuable.value operations blog through money control.kindly guide the books and magazines,to be read for knowledge.i would like to purchase.

Hi SK Bhatia,
Hope you like our posts and enjoy reading on our blog. These days I am reading book “This time is different”https://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152640
It talks about how from the past eight centuries before the financial crisis everyone talks about “This time is different” for its valuations and then we see collapse in the price. Worth reading as it is most relevant text for today’s market condition.
Thanks
Aziz